Where there is money there will be money-lenders, and increasing
numbers of foreign banks from the West as well as from the East are
making a beeline for India.

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Jagannath Dubashi

November 15, 1984

ISSUE DATE: November 15, 1984

UPDATED: May 5, 2014 17:11 IST

"Neither a borrower nor a lender be"- from Hamlet, Prince of Denmark

Polonius never got it right, just as he never got so many other things right. There are times, though, when his prudent if too conservative counsel seems to have its own logic as in the case of 20th century Latin America now billions of dollars in debt and ironically enough, likely to attract more money from banks desperate to ensure that their huge investments made in the first, second and third flush of funds and optimism are secured.

Where there is money there will be money-lenders, and increasing
numbers of foreign banks from the West as well as from the East are
making a beeline for India.

But there are also countries to whom the stick-in-the-mud advice of the prattling courtier does not apply and India, if not at the top of the list, is very near the top with credentials that positively glitter in a world riddled with bad loans: a track record of prompt debt servicing, a more or less stable political system and an economy which has managed to get along steadily.

The banks, of course, have known of this dream customer for a long time. However, with the Government of India's long-standing emphasis on cheap funds - read development funds from the World Bank and other such munificent agencies - they have not had much occasion to sell their wares.

However, the munificent agencies of late have become positively scrooge-like and have begun to argue that India should go in for commercial borrowing in a big way. India hasn't taken the bait resolutely, but western banks have been trooping to India in search of business.

India, cautiously, has been responding. In 1981-82 Rs 1,200 crore came to India in the form of foreign currency loans. In 1982-83 that figure shot up to Rs 2,025 crore. Central Government and the public sector alone borrowing over Rs 1,500 crore. The figure for 1983-84 is lower but still as high as Rs 1,082 crore. There is undoubtedly feverish activity on the foreign currency front.

Last month the National Aluminium Company (NALCO) borrowed $300 million from a syndicate led by Chase Manhattan. NALCO could be said to have sparked off the current spate of borrowing with its 1981 loan of $680 million, also raised by a Chase-led syndicate of 40 banks.

Bharat Heavy Electricals Limited has taken $50 million, Maruti Udyog $75 million, Reliance Textiles $16 million, Bajaj Auto $22 million, Hindustan Aeronautics Limited $30 million. The Tata Iron and Steel Company is reported to be next in line for an unspecified sum, as is Great Eastern for $12 million.

Says N.A. Soonawala director of Tata Industries, "A few years ago, less than a dozen banks would offer us money when we went out to shop. Now there are a score and over who've said they are interested, with more inquiries still coming in."

The lion's share of the foreign currency borrowings is taken by the public sector, led by NALCO and the Oil and Natural Gas Commission. Between April 1983 and July 1984, according to one count, 15 public sector companies and financial institutions raised Rs 690 crore or around 50 per cent.

Where there is money, there will be the money-lenders and increasing numbers of foreign banks, from the West as well as from the East, are making a beeline for India. The oldest in the country is the Banque Indosuez which opened its doors 140 years ago, followed by the Chartered Bank and Grindlays, 126 and 121 years old respectively. However, by 1969 there were still only 12 foreign banks in India.

For the next 11 years no new foreign bank came in but in 1980 their number had gone up to 17 and in less than a year 10 more were clamouring for licences - three from the UAE, two from the United States, and one each from Bahrain, Iran, Oman, Canada and France, the latest bank to open a branch being the Bank of Nova Scotia.

Apart from these, there are a dozen representative offices of such powerful leaders in the loan brigade as Chemical Bank, Manufacturers Hanover Trust Company and Chase Manhattan Bank. Says Sudheer Desai, vice-president and country manager, South Asia, of Chase: "India has come of age as a major chart."

So far, the terms have been good. The NALCO loan for instance was worked out in two portions. The first of $100 million, a tax-sparing portion with an interest of one half per cent over the London Inter-Bank Offered Rate (LIBOR) and the second and conventional portion of $200 million at three eighths per cent over LIBOR. Both foreign and Indian bankers agree that such rates are among the most favourable available.

The money market is a highly heterogenous one as far as interest rates are concerned. In India, the current rate is around 16 per cent. Abroad, each currency has its own price tag and the tags differ wildly. On one day last month, the dollar was available at nearly 12 per cent, the pound for 10.5 per cent, the Deutsche mark for slightly over 6 per cent, the yen for about 6.5 per cent and the French franc for nearly 13 per cent.

Since Indian banks have been expanding abroad in bigger numbers, the
principle of reciprocity has prompted the Reserve Bank of India to allow others to come in.

The cheapest currency was the Swiss franc, which was available for 5.25 per cent. Obviously, borrowing foreign currency is attractive. Not so obviously, borrowing dollars becomes necessary because firstly there are a lot of them around - the Eurodollar market is sizeable - and secondly because the market is limited for other currencies.

The reason for the sudden interest in India is as much India's high credit rating abroad as the fact that with so many banks sniffing around for a piece of the action, competition will necessarily keep the rates down. As a senior official of one of the biggest Indian banks comments: "For the time being the foreign banks' greed to do business will ensure that the money they lend is cheaper."

If the statement contains more than a hint of jealousy, that is understandable. Indian bank officials freely admit that they cannot possibly compete with their foreign counterparts. Says P.V.V.K. Rao, deputy general manager, International, of the Bank of Baroda: "The only competition for foreign banks at present is foreign banks. The only restraint in their functioning is riper resource mobilisation. Otherwise they can go wherever they choose, without the market handicap of having to fund priority sectors such as Indian banks have."

Also Indian banks and institutions just do not have access to the volume of funds that the huge American banks can put up: "The average size of an Industrial Credit and Investment Corporation of India (ICICI) loan for instance is $1 million, which is a small change for somebody like Citibank."

However, there does not seem to have been any major opposition to the fresh surge of foreign banks into India. Since Indian banks have been expanding abroad in bigger numbers, the principle of reciprocity has prompted the Reserve Bank of India to allow others to come in.

Why are foreign banks in India? Despite the fact that Indian credit as a whole is excellent, that India can absorb a lot more dollars, according to not so conservative estimates the working conditions in the country are not very congenial. The restrictive controls and poor communications apart, the effective tax rate for wholly foreign banks in India is as high as 82 per cent.

According to James Schlagheck, senior vice-president and regional manager for Bangladesh, Sri Lanka and Pakistan of American Express, they are interested in India because they hope that controls will ease in the future, because India wants to step up exports and they see greater possibilities of export financing, because of the consumer boom in India and the expansion of the market.

Another excellent reason is the margins. In the heated world of deposits and loans abroad, the margins are very thin and afford large profits only on substantial volume. In India, however, the margins are often quite large and hence are very lucrative.

Explains S. Srikanth, regional representative of the Bankers Trust Company: "We operate in the West on margins which are no more than an eighth of a per cent. Here we can take advantage of the margins 10 times that." Other foreign bankers, however, dispute that effective profit margins in India are higher because of the high tax rates.

Nevertheless, the banks are here to stay, even if it is only as a man on the spot with a briefcase. So far there has been just one drop-out. Wells Fargo of the United States, which opened a representative office in Bombay but downed shutters within a year of opening them, allegedly because of high costs. As if to prevent any more such casualties the RBI has been encouraging 'agency' relationships, where a local firm acts as the agent for a foreign bank.

That the RBI has smiled benevolently on this and similar tie-ups is a measure of the cordial relations between international banking and the powers that be in India and also the realisation that for India funding will not be as easy to find as before. As an RBI official puts it, "We have to live with these fellows. And we hope that besides bringing in the dollars they will also bring some of that high-tech expertise."

There are also reports that the foreign banks are being gently persuaded to enter fields other than trading which has so far been their forte. Foreign bank branches in India deal mostly with non-fund transactions like guarantees, letters of credit and so on, where risks are low and margins comparatively high - no wonder that they are 25 per cent more profitable than Indian banks, although there is no move as yet to push them into priority sector financing.

"The obvious reason for this," comments a senior official of a nationalised bank drily, "is that if they are ordered into what are essentially loss-making activities they will go away."

But as always, the bottom line looms large in the flurry of loans given and loans taken. For the moment, however, with the Government keeping tight control on the transactions - the yearly 'budget' for them is about $1 billion - there is absolutely no fear of India becoming the black hole for money that the Latin American countries have become.

That is just as well. Last fortnight, RBI Governor Dr Manmohan Singh said that Indian exports had to grow at around 6 per cent a year to enable it to service its debts.

Again last fortnight, first projections by the Planning Commission showed that exports could grow at an annual rate of 5.4 per cent during the Seventh Five Year Plan period if the current trend continued. So there is no room for complacency on the loans front and for some time to come caution will definitely be the watchword.

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